HSBC has taken a bold move that many in the industry have long considered unthinkable: It has put all of its advisors on salary.
Under a new compensation structure implemented at the beginning of the year, advisors are paid a salary plus a quarterly discretionary bonus, marking a major shift from being paid solely on commission.
HSBC confirmed what industry observers surmised. "HSBC introduced a new wealth incentive plan for its wealth sales team in the U.S. and other priority markets in January this year removing all product sales incentives, so our employees are rewarded on client experience, sales quality and values measures," Neil Brazil, vice president and senior manager of communications at HSBC North America, wrote in an email. "The plan is aligned with our aim of building long-term sustainable relationships with clients based on trust and expertise, and with HSBC's strategy and values."
The move struck many as a surprising departure from the industry norm of paying advisors on commission, typically a percentage of the revenue they generate for their banks.
Conventional wisdom says that paying advisors a straight salary will kill their motivation to build their businesses and prompt them to defect to other banks where they can make more money.
Indeed, many HSBC advisors are reported to have already left the bank for other organizations, according to Rick Rummage, founder and CEO of the Rummage Group, a career consulting firm. "HSBC doing that is insane," says Rummage. "Their revenue will drop because of what they've done."
Others agree. "When you move to salary, good reps will typically leave because they can make a whole lot more under other compensation systems and you're left with the poorer reps who really can't make it in the commission system," says Nathan Bergeland, founder and CEO of USAdvisors Network, a management consulting firm. "I was kind of shocked by it," he adds. "You see all sorts of firms do all sorts of crazy things. I think this is something that is a little bit crazy."
Scott Stathis, managing director at BISRA, a research and consulting firm for banks and credit unions, notes that advisors on salary and bonus are 16% less productive than commission-oriented advisors, according to the 2012 LPL Advisor Benchmarking Study.
To be sure, some in the industry defended the change. Without commissions, the fear or perception that advisors are "spinning accounts" or suggesting products and services merely to increase their production is removed, notes Wayne Cutler, a partner at management consulting firm Novantas.
The move may also help resolve cultural issues that have long divided bankers and advisors, say industry observers. Advisors on commission often make more money than bankers who are paid a salary and a bonus. The disparity leads to a great deal of animosity and jealousy between the two groups and prevents them from working together productively.
By putting advisors on a similar compensation structure as that of bankers, banks can help neutralize the animosity between the two groups, the thinking of many experts goes.
The salary-and-bonus structure that HSBC has put in place for advisors is a "wonderful way to present the overall value proposition of the bank, which includes wealth, to the customers. And it's a much more collegial approach to doing that," Cutler says.
Even if the bank runs the risk of losing their best advisors, this will help improve wealth penetration rates or the percentage of banking customers who have investments with their banks, Cutler says.
Others were sympathetic to both sides of the issue, saying they understand the bank's desire to better align advisor and client interests, but also realize that something as deeply rooted as compensation cannot easily be changed.
While there can be a perception that a commission structure can potentially be at odds with doing the right thing for clients, it's how advisors have been compensated for years, notes Steve Saltzman, a managing principal of Kehrer Saltzman & Associates. As such, this is a big change for them, he says. "From a cultural standpoint, it's pretty harsh in terms of the changes."
Saltzman's colleague Kenneth Kehrer adds another note of moderation: "I think it's a good idea to experiment with that [salary-and-bonus structure] incrementally so that you're not just throwing out a system that works fairly well."
The big question that remains to be seen is whether other banks will follow in HSBC's footsteps. Will this become the industry norm, or an outlier?
Cutler, of Novantas, sees banks making similar moves in the next two to three years. "Two to three years down the road, I'd be surprised if at least half of the top 30 banks haven't moved to the new structure," he says.
A number of those top banks are "having dialogue" about what a change to a salary-based compensation structure would mean and how best to implement it, although they are not likely to go cold-turkey as HSBC appears to have done. They will probably phase in the new pay structure gradually, Cutler explains.
Some banks are discussing three-year transition periods, including "grandfathering" arrangements that would allow existing advisors to stay on commission for a period of time with new advisors being paid on the new salary system, according to Cutler.
"They are trying to balance two objectives, which are realigning the compensation structure to meet the business objectives while retaining their best advisors," Cutler says.
Banks toying with the idea of switching their advisors to salary are likely to run two compensation systems in parallel to minimize the risk of losing their best advisors, which banks realize is significant,notes Cutler.
Still, Cutler sees the potential benefits of such a move as being too big to ignore for the bank, the top being profitability. "They need to find ways to do two things: one is to make sure that margins on that business meet hurdle targets for the bank, and if they're paying out too much of the revenue to the brokers, it's not going to meet those hurdle targets," he says.
Cutler also sees this as a way to integrate bankers and brokers, who have long refused to work together in part because they are compensated differently.
Other observers aren't convinced. They say there are other ways to address compensation and related cultural and integration issues. "I don't think a lot are going to race out and change wholesale the method and structure of compensation," says Mike White, president of Mike White Associates, a consulting and research firm based in Radnor, Pa.
White believes that there are other ways for banks to begin to approach compensation issues. They could, for example, seek different methods and levels of "equivalencies" to make sure that brokers and bankers are treated "equal in pay." For example, banks might consider putting bankers on a schedule of production equivalent to that of advisors, he suggests. Or they might want to emphasize more fee-based products among brokers.
For now, it's a waiting game. "I think it's going to be interesting to see how those changes pan out for HSBC. I would suggest that if they have good results, that maybe other firms think about that," says Saltzman.